The market seems pretty certain that the New Zealand central bank will usher in the strongest wave of monetary policy – and thereby carry increase – of the majors. Yet, if the outlook is so certain and hawkish; why is the performance for the New Zealand dollar not more bullish? The Kiwi reminds us that markets move to price in fundamental considerations as soon as they are deemed probable enough to be acted on; and fundamental impact – as with currency performance – is relative.

On Wednesday at 21:00 GMT, the Reserve Bank of New Zealand (RBNZ) is set to deliberate on the country’s monetary policy. According to the 15 economists polled by Bloomberg, the meeting will end with a 25 basis point (bp) hike to 3.00 percent. The market is equally as convinced that the policy authority will raise rates at back-to-back meetings. Overnight swaps are pricing in a 97 percent probability of another quarter-percent hike.

That certainty inadvertently diminishes the potential for bullish market response to this event while simultaneously leverages the potential and impact of a ‘disappointment’. If the market is certain of an impending hike, carry traders and speculative frontrunners should theoretically already positioned for such an outcome. As such, realizing the move would generated limited reaction for a stronger bullish swell as there would be few that haven’t already accounted for it. Consider, since the March 12 rate hike – the first – the New Zealand dollar has maxed out its bullish move with a 2 percent climb versus the euro. Its performance versus others is materially weaker – and even negative versus the Australian dollar.

And, what happens if the RBNZ decides not to move forward so aggressively with its policy course? If the bulk of the market is positioned for a hike, its absence could lead to a material unwinding of long exposure to account for a more moderate course of tightening. In other words, the market is already pricing perfection; and now RBNZ Governor Wheeler needs to keep pace.

In probability terms, a rate hike is the more likely outcome; but there will still be speculation surrounding subsequent moves. According to Wheeler’s own forecasts, he expected another 200 bps of tightening through the first quarter of 2016. That would mean that there are inevitably gaps between hikes. If that first wait-and-see moment is for the next meeting in June, the kiwi could fall back. The market will look to assess this in the central banker’s usually blunt commentary.

Another factor to keep in mind with this high profile event is that risk appetite dictates the influence that monetary policy changes have. In other words, if there is a market-wide ‘risk aversion’ drive; a 25bp increase in New Zealand’s still-historically low yield will likely do to quell the capital flight. And given the market’s pricing in perfection for the kiwi and New Zealand monetary policy, the risk is again amplified should risk aversion touch off. - JK

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